Life is uncertain. Insurance is for protection against uncertainty. So when we buy insurance, our objective is protection. In this blog, we cover everything you should know about insurance.

How insurance works

Let us begin with a simple story. There was a village beside a river. The river used to flood every year and four houses on average used to get destroyed due to the natural calamity. The village was such that all the houses were located within proximity to the river and they were all at an equal risk of damage. So all the villagers knew that four houses would break, but they did not know whose houses had that destiny in that particular year! 

So, the villagers mutually agreed to a plan. They found that rebuilding each house would take Rs.10000/- and there were 100 houses in total. So, rebuilding 4 houses would take Rs.40000/-. They raised this money every year by an equal share of 100 house owners. So each of them had to pay Rs.400/- to save Rs.10000/- in turn if damage hit them. This is the basic concept on which insurance works.

Who needs life insurance?

• A bread earner for the benefit of the dependants in case of death or self-protection in case of disability or loss of job.
• A housewife, whose labour of love supports the family
• A single parent of dependant children
• The Key manpower whose absence can financially damage a company
• A sportsperson, a celebrity or a person with higher exposure to life risks

Who doesn’t need insurance?

• A father on a child’s life, for future needs – insurance is not an investment
• Son on lives of the parents – there exists no insurable interest
• One who needs regular cash flows or income sources – insurance is not meant for moneyback
• A person who has no dependant shall not need a death benefit, but a cover for disability or loss of job.
• A person who is not earning anymore from a job, will not be required to indemnify his future income. 

How Term Insurance Protects You

Keep your life insurance in a pure term policy. Buy it as per your human life value, for the period left in your earning life. If your retirement is 20 years away, buy a term policy of 20 years. Human life value can be derived either in income replacement method up to retirement or in expenses method up to spouse’s or dependants’ expected life or financial needs. It is the sum of the present value of all your future earnings or the sum of the present value of all the future expenses needed for your dependants.

One needs to consider a few factors before getting Term Insurance. Term Insurance will not have any survival benefit. It is solely for families’ protection in case of death or disability of the policyholder. In India, life insurance policies generally do not cover retrenchment or loss of a job. Opt for term insurance if your family financially depends on you and also for yourself for disability.

You may opt for a Retrenchment cover if available, as some insurance companies are offering it post-covid. 

The efficiency of the Insurer is to be considered in the first place, followed by the claim settlement ratio. These will make the lives of the survivors easy if such circumstances arise.

The premium of an adequate sum assured of a term insurance policy is well affordable. No point in paying a lump sum extra as a premium for the investment part of it. When you go for car insurance, do you ask for a return of premium? When you buy medical insurance for a particular year, do you expect a money back? No, certainly not! So, why in the case of life insurance? Do not look for getting the premium back or bonuses from your life insurance. That is not the concept behind protection planning.

Buy insurance for the sake of insurance. If you add an investment to it, you get some return, but that is a different plan altogether and serves a different purpose. So invest the endowment part or money back part of your premium differently, in a vehicle meant for it.

Add necessary riders to the policy. This will provide further protection at a nominal cost. Important riders are critical illness for policy holder’s self-protection during the policy term and payor rider – for a policy assigned for the benefit of young children. A Payor rider will waive future premiums in case of peril, but the policy will continue to serve the goal.

Click the option MWPA for protection of wife and children. Under the Married Women's Property Act, 1882 this policy will protect their rights under any circumstance like a business loss or liability. 

If you too have a question, share it in the comments below or DM us or call us - +91 9051052222. We'll be happy to answer it.

- Aditi Nundy